I’ve opined multiple times over the past few years that there’s a bright future of collaboration and possibly integration between financial planners and tax professionals. After all, both frequently are on other sides of the same coin, and the divide between them often boils down to whether work is being done in arrears (e.g., tax professionals taking what’s already been done and converting it into a tax filing) and what’s being done in advance (e.g., financial planners making projections and recommendations to improve a client’s long-term outcomes.) Further, one might even argue that the best of both worlds is doing both sides of that: tax professionals getting into the business of tax planning and broader advisory or financial advice services, and financial planners adopting tax return preparation as part of their practice. Given that both professions expect to see significant attrition of professionals over the coming decade, it does not seem impossible that a few more years on, we might see tax professionals and financial planners as becoming synonymous in more ways than one.
However, it seems that there are a number of pain points in implementing this particular professional future, surmised by regular complaints by one side about the other in various mediums such as Twitter and LinkedIn. Today, let’s discuss some of the issues as seen by one side afflicting the other, and what might be done to mend those issues.
The Problem with Financial Planners and Tax Returns
Simply put, financial planners don’t really get along with tax returns. We see this in disparaging remarks made about the practice of tax preparation, a la “it’s just some forms,” made by both planners and clients. Yet, as any seasoned tax professional knows, there’s seldom such a thing as a simple return, and even seemingly innocuous details can lead to complex research to arrive at a reasonable conclusion.
However, because tax preparation is fundamentally a compliance activity, this often leads to devaluing tax preparation as an actual work activity. Because financial planners are often paid by means such as assets under management (AUM) or commissions that are unrelated to the actual time and effort, but instead the value, there is a fundamental mismatch between the necessary time required to adequately prepare a tax filing and the potential compensation related to that time and activity. For example, if a single preparer completes 200 returns in a tax season for $800 per return, a financial planner in a traditional 1% of AUM model need only contemplate whether it would take as much time to obtain $16 million in investable assets to replace not only the revenue but likely a substantial amount of the time and energy required year after year to produce those tax returns. Simply put, the actual activity of tax preparation, while extremely important and valuable for clients, is not considered a high economic utility use of a financial planner’s time.
The solution then would seem to be that financial planners should hire tax professionals to do the work for them. This is what’s already done in practice across the nation, either via outsourcing to third-party professionals willing to do more work for less compensation than the planner or by hiring tax professionals to work as tax specialists within a larger financial planning firm. Never mind the dichotomy between hiring EAs or CPAs; both designees are famously underpaid in the accounting and tax preparation worlds (unless they’ve attained partnership or firm ownership). This further exacerbates the “talent drain” on the accounting and tax professional pipeline, as many would-be tax professionals see the higher income potential and better work life balance on the financial planning side of the equation. So attracting the tax professionals from the accounting-based world to the finance-based world comes across as a strong value proposition to both sides. “You do the taxes for my clients for what seems like perfectly normal wages for a financial planning professional, and you get paid better-than-accounting-firm wages and probably get better work-life balance and benefits to boot.” Never mind that this exacerbates the supply and demand problem for qualified tax professionals and an ever-growing public!
The Problem with Tax Professionals and Client’s Experience
Despite the eye-rolls of many brilliant tax professionals at financial planners and their assorted dumb ideas (“Have you considered opening a Roth IRA for your newborn?”), there are some things tax professionals should pay attention to when it comes to financial planners and how they operate. A couple of key points of differentiation in the value propositions and client expectations:
First, financial planners sell themselves and their services as value creators. “Spinning gold from straw,” if you will. Tax professionals and preparers are often pigeonholed into being viewed as a compliance cost; while many highly skilled tax preparers engage in tax planning and often offer substantial value in the form of unnecessary tax costs and mistakes avoided, the problem is that this is fundamentally the selling of a lousy outcome averted. “You didn’t get into tax trouble. Do you see how much that saved you?” The problem is that you’re selling not only a thing that didn’t happen because you helped avert it, but you’ve reduced or averted a cost, not created visible value, at least in a client’s perception. Never mind that the difference you’ve made might be measured in the thousands, tens of thousands, hundreds of thousands, or even millions of dollars! Perception creates a warped reality: “My financial planner makes me more money, my tax professional… charges me for… something that didn’t happen. Hmm.”
Second, the dichotomy of a separate tax planner and tax preparer creates an unintentional “good cop bad cop” relationship between planners and preparers. The planner creates a model with a dozen tax-affecting recommendations, shows the client a vision of a better future net of less taxes, and then the client runs off to their preparer to share the good news. Unfortunately, this planner has been less than stellar at their work, and the preparer is given the thankless job of telling the client, “Sorry, but that’s not going to work.” Not to be deterred, the planner scapegoats the preparer as “not getting it,” and offers to help the clients find a “more understanding” tax professional. How does this play out if the planner and the professional are in the same shoes, or at least the same office, one wonders?
The third point is the hardest to say, but it must be addressed. Before I say it here, let me just say that many top notch tax professionals have already figured this point out; Some of them even shout it from the rooftops, trying to make an impression upon their peers. Unfortunately, too many have turned a blind eye and a deaf ear to this issue. So, a caveat for the top-notch tax professionals out of the way, let me say it: Public demand for tax services, exponentially growing tax compliance complexity, and a declining professional headcount have led to an industry-wide customer service problem.
“You want your return back before April 15th? You and everyone else, buddy.”
“Have a tax planning question? Not covered in my engagement letter, beat it or pay up.”
“Your lender wants a comfort letter? How’s a middle finger for comfort?”
“Yeah, last year’s price was $350, about $1,000 too low. It’s $1,350 now, so pay up or piss off.”
“We’re offering advisory services now. It’s $500 a month. No we’re not sure what ‘advisory’ means either, but we’ll figure it out after next year’s tax season.”
Does any of that sound familiar? Maybe you haven’t said it out loud, but have you thought it? Well, many of your clients have certainly heard it, whether you said it exactly that way or not. While many tax professionals have recognized the rapidly growing barbell distribution of H&Turbo Jackson on one side of the barbell where taxes are done for a whistle and a wink, and the other side of the barbell is finally charging reasonable prices for the scope of work demanded for tax professionals, there is a material client perception problem. While your burden of work has increased and prices have gone up accordingly, the public has not been kept in the loop. Don’t get me wrong, I’ve published a PSA about this every year since 2021, pleading for the public to get with the times, but unfortunately, 99.9999% of the population isn’t reading it. Thus, the broader public perception of many tax professionals charging reasonable prices for reasonable work is simply that the price has gone through the roof and the service sucks. Don’t shoot the messenger, I get an email from about 20-25% of our clients every tax season saying: “What the fuck, why does [my tax pro] suck at [communicating/responding/being-proactive/scheduling/getting my return done before April 15th] and charge twice as much as last year? Know anyone else?”
Resist the urge to say “fuck ‘em,” to those folks. Those folks are simply reacting to a stressor, and they do not understand the cause. They didn’t create the demand, they didn’t create the tax professional shortage, and they only indirectly created the tax complexity that has grown over the past several years (they voted for politicians who put this shit show together.) So, set the clients aside for a moment. What is the path forward?
An Earnest Proposal
Reading up to this point, you might think that as a financial planner, I’m pointing nothing but fingers at tax professionals. Nothing could be further from the truth. I am one of your biggest fans. You have all been tirelessly and thanklessly slaving away year after year for years trying to surmount a seemingly Sisyphean task of stagnant wages, non-stop regulation, and endless client complaints. I cannot begin to imagine the amount of work you’ve had to put in or the stress you’ve undergone getting this far. It’s time for that all to stop, or at the very least, to start getting away from the endless nightmare you’ve been enduring. So, here is my earnest proposal:
Don’t beat us, join us.
I’m not proposing that you all call up your local Edward Northwestern York Life Mutual company and ask to get signed up for their sales advisor development program. None of you should be hocking whole life policies or selling mutual funds. Your talents are far too valuable, and your time is already constrained enough. No, depending on where you are in your professional and personal life, pursue one of many options: Take the PFS to start and then pick up the CFP® Certification while you’re at it, or let your planning-obsessed business partner or employee do it. Merge with a local fee-only financial planning practice via acquisition or partnership. Consider opening an RIA if you have the requisite background, financial, and product knowledge from a former life.
It doesn’t matter which route you ultimately elect to take. What matters is that the hellish days of trying to grind out several hundred returns every spring, only to roll into the summer and fall without respite before it’s suddenly spring again, needs to stop. Many of your clients will come along for the ride. You need only explain that you’re moving up-market to a more robust and comprehensive set of services, and consequently, you’re going to charge accordingly. More value, more compensation, make sense? In turn, feel free to humble us financial planners. We’re easy to put in our place, and despite the loudmouths among us who never hesitate to question your value, remember that our skillset is much more dime a dozen than yours. While complex financial planning and learning the applied skillset of implementing financial planning strategy can take time to develop, I can say from experience it’s a heck of a lot easier than building up the tribal knowledge of exactly how every little facet of the tax code ties together. Heck, financial planning is only real financial planning when it’s a “net of tax” process, and you’re already well-equipped to take it one step further.
Some of you might scoff and ask, “Why should we come your way, why don’t you just come our way?” Well, long term, we probably should do that. But remember the economic problem I laid out above: Financial planners, in terms of time-to-compensation ratios, live “upmarket” of tax professionals. I agree it’s not fair, but that’s the way the market is valuing each party at the moment. Financial planners are unlikely to give up phenomenal compensation and work life balance to join you in the trenches of tax season. Some do, and bless them for it, but the average financial planner isn’t going within a mile of that work-life experience. Thems the breaks, as they say.
Still: the outcome should be obvious. The barbell mentioned earlier will extend further. The churn-and-burn shops that do low-quality work will continue to take on the vast majority of consumers, and those consumers will live by Hearn’s Law: “Pay for what you get, and if you’re lucky, get what you pay for.” For those who follow you into this next professional phase, and for future clients, everyone involved will have the good fortune of giving and receiving greater value, being paid better for it, and we’ll all be just a little happier to boot. As the time and value of tax preparation and financial planning level out with this trend, we’ll all (hopefully) end up in the same better-paid, better-balanced, and better-valued boat.